The past few weeks have been the most difficult period many investors have ever witnessed. Fear of a worldwide recession due to spread of coronavirus has spooked investor sentiment with Indian benchmark indices (BSE Sensex and NSE Nifty) falling over 20% this month, in line with many other global indices. After sharp corrections in three trading sessions on March 9, March 12 and March 16 by 5.1%, 8.1% and 7.9% respectively, the BSE Sensex, one of the widely used equity market indicators in India, crashed by an overall 19.83% this month till March 17.
While any significant market correction erodes a substantial chunk of investors' wealth, but more often than not, it is followed by a handsome recovery within 3-5 years. So if you are a long term investor it could also be an opportunity to buy some quality stocks at very cheap valuations.
"Global equity markets tumbled in the last one month as Coronavirus (COVID-19) spread to more than 100 countries, becoming one of the biggest threats to the global economy and financial markets. In fact, the World Health Organization (WHO) has declared the coronavirus outbreak a pandemic (an epidemic that has spread over several countries), creating panic in the equity markets," says Siddharth Khemka, Head - Retail Research, Motilal Oswal Financial Services.
Overall this year the Sensex has fallen by more than 25% from its peak closing of 41,952 on January 14 this year. So if you are planning to buy some stocks, is this a right time that you were waiting for? We tell you how should you identify a right sector and a stock?
Will it offer advantage to India?
China is one of the major source for providing critical components and raw materials for many Indian manufacturers and lock down in China has severely affected their ability to produce. Besides sourcing, there is significant reduction in demand as entire world is almost facing restriction on movement of people and goods. However, India as major importer of crude oil also likely to benefit. "Correction in crude prices augurs well for Indian markets and is an immediate benefit. Actually, the benefits of crude oil correction outweigh the market volatility in the equity markets. Both these factors make Indian equity markets a good investment proposition" says says Pankaj Bobade, Head- Fundamental Research, Axis Securities.
Eminent recovery may change some old business order
When the recover starts many big global companies which were majorly dependent upon China will diversify their sourcing and India is poised to get a good chunk of it. "The coronavirus episode has brought forth the excessive dependence of global supply chains on China. In course of correction measures, India offers an excellent alternative to relocate these manufacturing activities, as India offers educated, low cost English speaking workforce along with the scale that can match that of China, though it may take a couple of quarters to make it happen," says Bobade of Axis Securities. Investor with long term investment horizon can factor this eventuality when taking their investment calls.
Avoid going for overkill
As most of the stocks are appearing to be cheap so it should not lure you into buying everything that comes your way. At this juncture investors should be very selective in their stock picking. "Value investing could surely work at this stage. Don't lose sight of your patience or of your asset allocation. Don't over-diversify your stocks. Diversification sure does help cushion your overall portfolio and temporarily limit the downside. But this may also keep you away from gaining meaningfully when the market recovers," says Jashan Arora, Director Master Capital Services.
The way market has been hammered no stock looks immune to correction. "While the coronavirus outbreak has both economic and political implications, the exact nature and quantum of the same are difficult to estimate. Global growth and trade might deteriorate further if the current situation persists or escalates further. The full economic impact of the outbreak will not be clear for months, but it is most likely to be severe. In addition the collapse of oil prices due to price war between Saudi Arabia and Russia is having a catastrophic effect. Thus, at this juncture it would be difficult to say which sectors could be resilient," says Khemka of Motilal Oswal Financial Services. Therefore even the best performers have not been spared by the recent fall and further future corrections cannot be ruled out. While going for investment you should always plan for possibility of further correction.
Identifying the attractive sectors
The biggest challenge which an investor faces is how to identify a right stock for long term investment. While fundamentals of the company have to be strong however the future growth will be more critical in deciding its return potential. "Companies who use crude oil as raw material to benefit from the low crude price, thus, helping them improve their margins. Global easing and low crude oil prices are expected to help RBI see through the transient inflation. RBI is expected to ease policy rates in upcoming bi-monthly meet in first week of April 20. All these combinations make Indian equity markets relatively better off, compared to its global peers and the sectors like private banking, autos, consumer staple & discretionary consumption plays, specialty chemicals etc., are expected to report quicker recovery," says Bobade of Axis Securities. There are many other sectors which have left their worst behind and there are many others which have high resilience. "In pullback major recovery in Private banking, Telecom, NBFC & FMCG looks better sectors to recover faster," says Vishal Wagh, Research Head of Bonanza Portfolio.
How to get the timing right
If you are a conservative investor you should not get into such high risk investments. Investing in such a falling market suits only to those investors who have high risk appetite and are ready to bear some short to medium term loss. If you have the desired risk appetite you can make a move. "It always rewards investors in the long term who take the benefit of such sharp fall. Markets may continue to fall in near term, and that's the time to start becoming greedy," says Khemka of Motilal Oswal Financial Services. In such a volatile situation the last thing you would like to do is to put all your investment at one go. "Since it is difficult to time the markets, one should keep his shopping list ready and accumulate quality stocks in a staggered manner," says Bobade of Axis Securities. When you plan to invest in parts you get the flexibility to absorb more correction by averaging your cost. Whenever recovery takes place over long term investors will low cost of acquisition are bound to benefit more.
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